Lifetime allowance - Top tips

Thousands of people have been dragged into paying additional tax on their pension savings in the last decade. With the Lifetime Allowance (LTA) threshold frozen until 2026, this upward trend won’t slow down, hitting both Defined Benefit (DB) and Defined Contribution (DC) pension savers, especially those with generous pension perks.

Freezing the cap is effectively a punishment on saving into a pension, the very thing people are encouraged to do. And the reality is that a £1million pension pot won’t go as far as many believe. Outgoings, like care costs or supporting children or grandchildren, have the potential to swallow up a large chunk of this, even just a short time into later life.

This is why planning ahead is so crucial. Firstly, to know if you are on track to breach the Lifetime Allowance and secondly, to weigh up the benefits of continuing to contribute to a pension against other ways of saving for later life.

Below are six top tips for protecting your pension from LTA

1. Review your pension position

The very first thing is to see if you are at risk of breaching the Lifetime Allowance. This means knowing how much you have in each pension and using a calculator to work out your risk of breaching. Mazars free Lifetime Allowance calculator can tell you your overall risk, the age you are expected to breach the limit and how much by, depending on your target retirement age. This will arm you with the detail you need to make some decisions.

2. Assess your other benefits

If you are at risk, you should seek advice as everyone’s circumstances are different and there is not a simple solution for all.

You will want to weigh up any other benefits which make footing the 25% or 55% tax bill more palatable. It might be generous employer pension contributions or you might be willing to accept the higher rate because pensions aren’t subject to income or CGT tax on pension investments while invested, which should boost your returns.

3. Have you got or do you qualify for pension protections against an LTA charge?

You may be able to use protection to lift your Lifetime Allowance limit. There are some rules around the timings of contributions and pension pot size but it’s worth looking into these especially if you are a final salary scheme holder or have multiple pensions. If you are considering protections it is important to speak to an adviser.

4. When you reach retirement,use your LTA wisely

If you have both final salary and DC pensions, you should consider the order in which you draw benefits and how your benefits are impacted by the Lifetime Allowance. The way the tax charge is applied can differ depending upon the type of scheme you draw from. Professional advice here is crucial.

5. Keep saving but be ready for the tax bill

If you decide to keep saving into a pension, even though you expect to surpass the LTA threshold, be ready for the tax bill. Your pension savings will be tested against the LTA at numerous times through your retirement, including each time you crystallise benefits before 75, death before 75 and when you reach age 75. Accessing your pension or hitting this milestone should be a reminder that there might be a tax bill coming your way.

6. Speak to a financial adviser

LTA rules and deciding how to navigate them when you are saving money can be difficult and there are several options available. The good thing is that there are advisers who know every aspect of these rules and can help you find a way through that works for you. If you are unsure and don’t know where to start, don’t worry. Just speak to a financial adviser who will be able to help.

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If you would like to speak with one of our advisers about pension planning or managing your LTA risk, please do not hesitate to get in touch.

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Lifetime Allowance FAQs

Our Lifetime Allowance FAQs explain all you need to know about the recent freeze, how this could affect you and what you need to do.

Pension Planning

For most, retirement will be funded in the main by a pension. It is therefore vital you have a robust plan in place that will allow you to grow and protect your pension, both now and in the future.

Changes to the Pensions Lifetime Allowance

Pensions are a tax-efficient way to save. An individual receives tax relief on the money paid in, tax-free growth during the period that they hold a pension, and the ability to access money tax-efficiently in retirement (a combination of tax-free cash and taxable income). There is no limit on how much can be built up within pensions, however taxes may be applied upon drawdown.